by Carl Horst

Washington, D.C.--Despite the headlines and national news stories, the housing market is doing just fine--or on the road to recovery--in most markets, according to a senior economist with the National Association of REALTORS.

"Currently there's wide divergence in the marketplace...and that's because there's not a single housing market,” Lawrence Yun told attendees at the NAR Midyear Meeting in Washington in mid-May. "All real estate is local...with local trends and local forecasts. What's happening in New York or Los Angeles varies from what's going on elsewhere.”

Huge price spikes in markets on the nation's coasts during the past five years differ greatly from what has taken place in the country's midsection over the same period. To that point, Yun noted that the average price in Los Angeles in 2006 was about $600,000 (compared to a $200,000 average in 2000), while Columbus has displayed "slow, steady” growth in prices during the same span.

"An event may happen in Columbus in the next 25 years that could spike the market's prices,” Yun said. "The only way to participate in any boom is to be a home owner.”

Yun concedes that the market is slowing from its record pace, however every indicator points to it being a "soft landing as opposed to a crash.”

In 2007 NAR is projecting that the average price nationally will drop 1 percent--with some markets posting big declines and others showing gains.

"Since we began collecting housing data in 1968--and probably since the Great Depression--the housing market has taken 50 steps forward...and, in all likelihood, one small step back this year.”

Yun said the housing correction taking place doesn't lie with home prices, but rather with a slowdown in construction of new homes. There will be a 33 percent drop in new single-family homes constructed since a peak two years ago. As a comparison, there will only be an 11 percent retreat in the same period in existing home sales.

"The fact that home builders are cutting back is positive correction so there is not too much supply,” Yun said. "The latter part of the (recent) housing boom was investors flooding the market. Now they want out.”

Sales of speculative homes fell 29 percent in 2006 (from the peak of 2005). Interestingly, sales of vacation and second homes have steadily risen in the same period.

"That's due to the fact that boomers have entered there prime earning years.”

Yun said that the importance of housing to the nation's economy cannot be overlooked.

"Housing accounts for 20-25 percent of the overall economy...and because there's less activity in the housing market right now, it's pulling down the nation's GDP growth. Our GDP has fallen below 3 percent primarily due to the impact of a slower housing market.”

To turn things around, Yun said consumers will need to regain confidence and overcome fears of a "bubble.” An economist from Yale University recently predicted that home prices will drop 40 percent nationally in the next decades.

"That projection was based on graphs that depict a wide gap between home prices and income. However, the mortgage obligation to income is actually extremely manageable. Consumers ask if they can make the monthly mortgage payment. With a 6.1 prime lending rate...things are at historic lows.”

Even then, markets differ with the mortgage obligation to income ratio. Yun provided a comparison of the debt service to buy a median priced home by a middle income family in four markets: San Diego--a very high 45 percent; Miami--a historic high of nearly 30 percent; Boston--a manageable 21 percent; and Louisville--a favorable 11 percent.

"You can include Columbus in the very favorable category,” Yun noted. "In Midwestern markets, if you have a job and good credit you can own a home--perhaps not a dream home, but they can own.”

While NAR was bullish on the housing market regaining its strength beginning in spring 2007, "we didn't factor in the impact of subprime (loans).”

Not surprisingly, mortgage delinquencies are highest among those consumers with subprime loans. Delinquencies among subprime consumers tend to fluctuate according to the condition of the housing market--rising with job losses or sales slumps--and dropping during the boom period. Subprime delinquencies are currently topping 12 percent, well above the prime rate of below 3 percent.

"As with any new product, there has been some adjustment. Things were a little too exuberant (in the subprime market) and now tightening standards appear to have things contained.”

In fact, Ohio and neighboring states Michigan and Indiana are among the top five markets nationally in terms of highest delinquencies--primarily due to job troubles. The other two, Louisiana and Mississippi, are still impacted by Hurricane Katrina.

Similarly, all the foreclosure action is taking place in the subprime market. Yun noted that this trend will continue to rise through 2007 and into next year.

Ohio is tops in the foreclosure category (more than 3.2 percent), followed by Indiana and Michigan. Nationally, the foreclosure rate just exceeds 1 percent.

Yun said jobs will buffer the subprime fallout.

"There's been steady US job gains...two million in the past 12 months...and wages are picking up."

Boston, which was the first market to enter a housing slump in 2001, is among the first markets to come out of the doldrums because of job growth. Similar rebounds are occurring in Seattle, New Orleans, Dallas-Ft. Worth, Tampa-St. Petersburg, Phoenix, and Washington, among others.

Detroit, still suffering from job losses, is among the markets still in the midst of a housing slowdown.

Stable mortgage rates will help the housing market regroup.

"Rates are at near 45-year lows, which should drive the market” Yun said. Interest rates in the 2000s have averaged 6.5 percent, compared to an 8 percent average in the 90s, 13 percent average in the 80s and 9 percent average in the 70s.

"Housing is staging a comeback--jobs are being created, rates at near historic lows, there's no further artificial swings by speculators, rising buyer confidence. It's time to set the record straight--all real estate is local.”

Yun pointed to a number of key housing indicators:

--Existing housing inventory has begun to hold steady.

--New home inventory has topped out.

--Mortgage purchase applications have begun to increase after a low point last September.

--The price correction for both single family and condos appears to be over.

--And housing affordability is improving.

NAR has begun tracking home data on real time--as opposed to once a month previously. Recent results show marked improvements in both sales and average price from the prior year.

"Economically, there is no recession in sight,” Yun said. "By 2008 we should be returning to normal. If inflation is contained we'll see lower rates. That may not translate to long-term rates, such as a 30-year mortgage, but adjustable rates will likely decrease.

"On the housing side, the average price will only be down 1 percent from 2006--which happened to be our third best year ever. Sales will drop to 6.29 million from 6.48 million in 2006. On the upside, we're looking at 6.49 million sales in 2008, with a 1.4 percent increase in prices.”